The Supreme Court recently held oral argument in a securities fraud enforcement case that could drastically impact regulatory agencies’ ability to use administrative law judges (ALJs) in various enforcement contexts, including in civil environmental enforcement actions. A majority of the justices seem willing to eliminate or seriously curtail the use of ALJs by federal agencies based on constitutional concerns.  

On November 28, 2023, the Supreme Court heard arguments in Securities Exchange Commission v. Jarkesy, in which the Fifth Circuit held that the adjudication of securities fraud claims by an ALJ was an unconstitutional violation of the respondent’s right to a jury trial under the Seventh Amendment.  Several conservative justices appeared to find the Fifth Circuit’s holding persuasive, with Justice Neil Gorsuch remarking that “if the government sought the same penalties in a criminal proceeding, a jury trial right would attach.”  Notably, much of the conduct that forms the basis of civil regulatory enforcement claims also can be subject to sanction under criminal statutes, albeit with a higher burden of proof on the government.

A ruling affirming the Fifth Circuit’s holding would upend the enforcement schemes used by the Environmental Protection Agency (EPA), Occupational Safety and Health Administration (OSHA), Securities and Exchange Commission (SEC) and other federal agencies.  Federal agencies, including EPA, often use ALJs to adjudicate civil enforcement actions seeking penalties or injunctive relief, such as installation of pollution control equipment.  The use of ALJs allows such actions to be resolved more quickly than filing in federal court would allow, and ALJs are generally better-versed in the subject matter of the administrative complaints they adjudicate.  On the other hand, litigating such claims in federal court typically requires substantially more resources and time, and entails a higher burden of proof for the government when seeking rapid injunctive relief such as the immediate cessation of an activity.  Should the Supreme Court determine that agencies’ use of ALJs violates the Seventh Amendment right to a jury, federal agencies will likely face greater pressure to settle or decline to pursue certain civil claims. Agencies also are likely to be hindered in attempts to advance novel enforcement theories due to litigation risk.  Of course, regulated parties will similarly face increased pressure to settle so as to avoid the resource drain and risks associated with litigation.

Several justices appeared to recognize the extensive impacts such a decision could have on agency enforcement and federal courts.  Indeed, much of the justices’ questioning focused on establishing some test or limiting principle for determining whether the right to a jury applies to a particular civil enforcement action.  In response to questioning, the respondent argued that the Seventh Amendment’s qualifying language “[i]n suits at common law” should be interpreted to apply to civil claims which “serve the same essential function” as common law torts, and to exclude “prophylactic claims” designed to prevent harm.  Justices Gorsuch and Kavanaugh suggested that  a distinction could be made in cases where the government seeks to impose a penalty on a defendant versus instances where a particular individual is seeking some federal benefit, like Social Security.  

For agencies like EPA, even a narrowly-construed test would likely result in significant changes in agency enforcement because it would likely preclude the use of ALJs to resolve civil claims seeking penalties or corrective actions to minimize harm to the environment.  Such a change also would likely have immediate impacts:  there is already at least one active suit against EPA alleging that an EPA civil enforcement action brought under the Toxic Substances Control Act is unconstitutional on the same Seventh Amendment grounds alleged in Jarkesy.  If the Supreme Court ultimately limits the use of ALJs in agency enforcement, a wave of similar challenges to enforcement is likely to follow, regardless of how narrow that limit is.

Authored by Adam Kushner, Misty Howell, and Alexander Woo.